Picture supplied
This is sponsored content by PropCompanies.
Forex trading, or foreign exchange trading, involves the buying and selling of currencies to capitalise on exchange rate fluctuations. It takes place in the forex market, which is the largest and most liquid in the world. It's worth $2.73 quadrillion in total and boasts a daily trading volume of $7.5 trillion over-the-counter (OTC).
In this guide, we'll explain how to trade forex and the key steps involved. This includes:
- Educating yourself about forex trading
- Choosing your forex broker and platform
- Opening a live trading account
- Developing your trading strategy
- Practising trading with demo accounts
- Starting to trade forex with real money
- Monitoring forex markets and open positions
Getting started Forex Trading
In Australia, forex trading typically involves Contracts for Difference (CFDs) where traders don't buy or sell the actual currencies but speculate on their price movements. An advantage of trading forex CFDs opposed to the underlying asset is the ability to use leverage, which allows traders to open larger positions than their account balance would usually permit, thus amplifying both potential risks and rewards.
Another major advantage of trading forex pairs is the market's opening hours. Unlike centralised commodity or stock markets, you can trade forex 24 hours a day, 5 days a week, with four main trading sessions in New York, London, Sydney, and Tokyo.
1. Learn about Trading Forex and CFDs
To learn about the fundamentals of forex and CFD trading, you can draw on numerous educational resources, including broker training courses, review websites, and YouTube. The top brokers offer free learning modules that cover the basics of forex, technical analysis techniques, and risk management strategies. Additionally, consider exploring YouTube tutorials, webinars, and websites that compare forex brokers and provide collated data surrounding pricing and fees.
The forex market is renowned for its volatility and high risk, and it's vital to understand how forex trading works before you get started.
2. Choose your Forex Trading Platform and Broker
Once you have grasped the key concepts of trading, the next essential step is selecting a broker and trading platform that aligns with your trading needs and style. This choice is crucial as brokers vary significantly in their software offerings, pricing structures, and overall service range.
Researching Forex Brokers
For forex traders in Australia, it's always recommended to choose a broker regulated by the Australian Securities and Investments Commission (ASIC). This ensures your capital is safeguarded in line with ASIC's stringent requirements.
When evaluating ASIC-regulated brokers, it's important to consider several key factors. One of the primary considerations? The competitiveness of spreads and the extent of the trading fees. Brokers often provide information on their average or minimum spreads, which can be a critical factor in your trading costs.
To help you find the lowest spreads, review websites frequently compile and compare this data, offering a convenient way to evaluate different brokers.
Forex brokers typically offer one or both of the following account types:
- Commission Accounts: Also called Standard Accounts, these accounts have wider spreads but no commission fees, making them ideal for beginners.
- Commission Free Accounts: Also known as 'Raw' or 'ECN' accounts, these are designed for active traders wanting institutional-like trading conditions. You pay a flat rate commission fee for each trade but gain access to more competitive spreads.
As well as low spreads, look into the broker's range of trading platforms offered, the financial markets available to trade, and the quality of customer support.
You can find more information about the Best ASIC-Regulated Brokers here.
The Best Forex Trading Platforms
Globally, the most popular forex trading platforms are MetaTrader 4 (MT4), MetaTrader 5 (MT5), and cTrader. Most top brokers offer at least one, and many offer all three. Retail traders favour these platforms for their user-friendly interfaces, customisation, advanced charting tools, and automated trading capabilities. Additionally, many brokers offer proprietary trading platforms that often offer unique features like social or copy trading.
When selecting a trading platform, it is also important to consider the availability of mobile apps. The ability to trade on the go is vital in the fast-paced forex market. Most platforms are compatible with iOS and Android devices, ensuring you can manage trades anytime, anywhere.
Lastly, the importance of fast order execution speeds cannot be overstated. A platform that executes orders quickly minimises the risk of slippage, which is the difference between the expected price of a trade and the price at which the trade is actually executed. Efficient execution ensures that your trades are carried out at the best possible prices, directly impacting your trading success and profitability.
You can read more about the best CFD Trading Platforms for Australian Traders here.
3. Open a Forex Trading Account
Opening a forex account is a relatively straightforward process, but it does involve several steps to ensure compliance and security. The first step is to complete the online application process and verify your identity. This typically involves providing a government-issued ID, such as a passport or driver's license, along with a utility bill or bank statement to confirm your address.
Once your identity has been verified, the next step is to fund your trading account. Forex brokers offer various methods for depositing and withdrawing funds, such as debit and credit cards, wire and bank transfers, as well as e-wallets like Skrill or Paypal. Make sure you've looked into whether any fees apply when using your preferred payment method, as this varies between brokers.
4. Develop your Forex Trading strategy
Developing an effective forex trading strategy requires a blend of market research and clear risk management protocols, as well as a deep understanding of both technical and fundamental analysis.
Initially, decide on your trading approach: will it be traditional trading, social or copy trading, or using automated systems like Expert Advisors or bots? Once you've chosen your approach, familiarise yourself with popular strategies like scalping, day trading, breakout trading, and carry trading.
Picture supplied
Next, craft a detailed trading plan that defines your goals, trading style, risk tolerance, and the time you can commit. This plan should also include specific entry and exit strategies and a framework for the types of trades you will make based on your market analysis.
Incorporate technical analysis to identify trading opportunities through patterns in price movements using tools like indicators, trend lines, and candlestick formations. Complement this with fundamental analysis, which involves evaluating factors such as economic indicators and geopolitical events to understand their impact on currency prices.
Finally, prioritise risk management to mitigate the inherent high risks of trading and minimise potential losses. This involves setting stop-loss orders, carefully managing leverage, and calculating position sizes to ensure you are not overexposed on any single trade. By combining these elements, you'll establish a well-rounded strategy that can navigate the complexities of the forex market.
5. Practise with Demo Accounts
Demo accounts serve as an invaluable educational tool, allowing you to familiarise yourself with trading platforms and refine your strategies in a risk-free environment. Most brokers offer free demo accounts with varying virtual balances to enable you to get comfortable with market dynamics and analysis without any financial risk.
As well as refining trading strategies, demo accounts are a great way to develop emotional discipline and a structured mindset when trading. By practising in a simulated environment, you can hone your decision-making skills, learn to stick to your trading plan, and understand how to react to market movements, all without the pressure of actual financial loss.
Once you feel confident in your trading abilities and strategy, you can transition to live trading with real money.
6. Start trading with real money
Once you've gained confidence and perfected your trading strategy, the next step is to trade currencies with real money. Keep in mind that strategies that worked well in a demo environment may need adjustment when applied to genuine market conditions due to factors like slippage and market liquidity.
Start with a conservative approach, using low levels of leverage initially. Lower leverage minimises risk as you adapt to the vagaries of real market conditions. It's also important to maintain a disciplined mindset, as live trading can evoke stronger emotions than a practice environment.
The transition to live trading doesn't mean you should abandon your demo account. It remains a valuable tool for testing new strategies and refining existing ones. If you encounter new challenges or want to experiment with different techniques with other CFD products, such as crypto, commodities, interest rates, stocks, indices, or ETFs, the demo account can serve as a training ground.
7. Monitor Forex Markets and open positions
Effective monitoring of forex markets and your open positions involves a vigilant approach to staying up to date with both global economic trends and your trading strategy's performance. Utilise real-time data, such as newsfeeds and economic calendars, alongside technical analysis tools to stay abreast of market movements and potential impacts on your trades.
Regularly review your open positions against your trading plan, employing stop loss and take profit orders to manage risk and protect your capital.
Picture supplied
How to Trade: FAQs
What are the major currency pairs?
The seven major currency pairs in fx trading, which include the EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, USD/CAD, and NZD/USD, represent some of the largest economies in the world. These pairs are known for their high liquidity and relatively stable trading conditions.
The Euro vs US Dollar (EUR/USD) is the most traded currency pair globally, reflecting the economic dominance of the Eurozone and the United States. The US Dollar vs Japanese Yen (USD/JPY) is the second most traded currency, followed by the Great British Pound vs US Dollar.
What is the bid/ask price?
The bid and ask price in forex trading refers to the two prices at which a currency pair can be bought or sold: the bid price is what buyers are willing to pay, and the ask price is what sellers are willing to accept. Understanding the bid/ask price and concept of the spread is fundamental for fx trading as it reflects the cost of entering and exiting trades.
The difference between the bid and ask price is known as the spread. The spread is a key cost for traders and varies from pair to pair, often reflecting the liquidity and volatility of the currency pair. In general, major forex pairs like the EUR/USD and USD/JPY have narrower spreads compared to minor or exotic fx pairs.
What is a pip?
A pip in forex trading is the smallest price movement that a given exchange rate can make, typically the fourth decimal place or 1/100th of a percent. Some currencies, like the Japanese Yen, however, only go so far as the second decimal place.
Example: AUD/USD
Pretend you've been analysing foreign currency trends and identified an opportunity with the AUD/USD fx pair. You believe the Australian Dollar will strengthen against the US Dollar due to a positive report on Australia's employment data, so you decide to buy.
Let's say the quoted AUD/USD exchange rate is 0.7305/0.7308. Here, the base currency is Australian Dollars, and the quote currency is US Dollars. The spread is the difference between the bid and ask prices, being:
Spread = 0.7308 - 0.7305 = 0.0003 = 3.0 pips.
If, following the employment report, the market price moves from 0.7305 to 0.7310, that's a movement of 5.0 pips in your favour.
Example: USD/JPY
Now, let's take the USD/JPY pair. You anticipate the US Dollar will weaken against the Japanese Yen due to a forecasted increase in Japan's interest rates. You decide to take a short position on USD/JPY. The current quote for the fx pair is 110.00/110.03. Here, USD is the base currency, and JPY is the quote currency. For every unit of the base currency (1 USD), it costs 110.03 JPY to buy and 110.00 JPY to sell, making the spread 3.0 pips.
If the USD/JPY shifts from 110.00 to 109.90, the market has moved 10 pips in your favour, indicating a successful short position.
Is Forex trading good for beginners?
Yes, forex trading can be suitable for beginners, but it requires a careful approach due to the high-risk nature of currency markets. As a beginner forex trader, it's important to choose a reputable brokerage, understand your personal financial situation, and have a solid grasp of how financial markets operate.
Forex trading offers beginners a unique opportunity to enter global markets with relatively low capital requirements and flexibility in terms of trading hours. However, it is essential for beginners to be fully aware of the risks involved, including how leverage amplifies both gains and losses. If you are new to fx trading, it is wise to start out by trading small amounts while using leverage with caution.
What are the dangers of trading Forex?
The dangers of trading forex include leverage risks, interest rate risks, transaction risks, counterparty risks, and country risks. Each of these risks can significantly impact the success of your forex trading activities:
- Leverage Risks: Leverage can amplify gains but also losses. High volatility and aggressive use of leverage can lead to significant losses.
- Interest Rate Risk: Changes in a country's interest rates can affect its currency's strength. Higher rates often attract foreign investments, leading to currency appreciation, while lower interest rates can lead to a currency's value depreciating.
- Transaction Risks: Due to the 24-hour nature of forex markets, exchange rates can fluctuate dramatically between the opening and settlement of a trade.
- Counterparty Risks: The risk of the broker or financial institution facilitating the forex trade defaulting or failing to meet their end of the transaction, especially in volatile market conditions.
- Country Risks: The economic stability and policies of a country can impact its currency's value. Political instability, economic downturns, or changes in regulatory frameworks can lead to currency devaluation.
What are the Forex Trading Rules in Australia?
Forex trading rules in Australia are set by the Australian Securities and Investments Commission (ASIC), which ensures fair and transparent practices in fx markets and derivatives trading. ASIC requires forex brokers to hold an Australian Financial Services License (AFSL)and enforces strict standards for operations and trader protection.
ASIC regulation includes specific rules around leverage limits and the provision of negative balance protection. These measures are designed to mitigate the risks associated with the fx market's inherent high volatility. For example, when you trade major currency pairs, ASIC limits leverage to 30:1, while minor and exotic currency pairs are restricted to 20:1 leverage.
Negative balance protection aims to ensure forex traders don't lose more money than they have in their trading accounts, a rule also enforced in other jurisdictions like Europe and the UK. These rules safeguard retail traders' interests while maintaining the integrity of the Australian foreign exchange market.
Disclaimer: This guide is for informational purposes only and not intended as financial advice. For personalised guidance, consult a financial services advisor.
Disclaimer: This story may include affiliate links with PropCompanies partners who may be provided with compensation if you click through. ACM advises readers consider their own circ*mstances and needs. You should verify the nature of any product or service, and consult with the relevant regulators' website before making any decision.
